Though managing in tough times can test a leader's mettle, the bigger test often comes when times are good. A crisis, if well-managed, can bring out the best in a company—increasing focus, intensity, and commitment. It's when a business gets a comfortable lead that the greatest dangers lurk: Complacency creeps in on little cat feet.

When I was in my mid-30s, I became chairman of a promising Los Angeles-based technology company. The business had doubled revenues every year except one for 15 straight years, growing into a national company with 3,500 clients. It had twice made the Inc. 500 and had even been featured on Inc.'s cover. We were about to close on some badly-needed venture capital to prepare us for an IPO, and we had just inked alliances with Mellon Bank (MEL) and EDS (EDS). Times were indeed good, or so we thought.

Then the bottom fell out. One February morning, our CEO handed me a letter from the Business Software Alliance (BSA), the organization empowered by major software companies like Microsoft (MSFT) and Symantec (SYMC) to prosecute companies that illegally copy and use their software.

A Close CallAs I scanned the letter, my eyes fell on the words "federal criminal action pursuant…fine of up to $250,000 and imprisonment of up to five years." They wanted $2 million dollars to settle the suit—a fact sure to send our new investors running for the hills. (I later discovered that a few of our employees had, in fact, winked at software-licensing laws.)

Somehow we held the new investor group together while we negotiated a settlement with the BSA—and closed our multi-million dollar funding just before we ran out of cash.Within weeks of closing our funding, things went from bad to worse. Our largest client, responsible for several million dollars of annual revenue, went into a financial tailspin, and we began burning hundreds of thousands of dollars of cash a month. Thirty days later, our bank called in our loans (more than $2 million) and threatened to sue us if we didn't pay immediately. And all this bad news wasn't lost on our new investors, who had watched two-thirds of their investment evaporate in 90 days. They began to use the word "attorney" in our calls with them.

Painful ReductionsFearing that our company would end up fighting for its survival in court, I booked rooms at a local hotel for our top five executives and hired a facilitator to lead us through a discussion of our options. Three brutal days of shouting, blaming, and denying ended with the decision to reorganize: I stepped into the CEO role and our former CEO became chairman and focused on trying to replace the lost revenue. We presented the plan at the next board meeting—and the board gave me 90 days to turn the company around.

We spent the better part of two years fighting our way back to financial health. The emotional costs were high: Over a six-month period, we were forced to reduce head count from 300 to 90, and to replace or move to different positions eight of the top 11 executives. But it was worth it. In the four years following the turnaround, the company would grow to more than 2,000 employees.

This experience remains both the high point and the low point of my business career. It was the low point because I had to face the fact that our executive team had become arrogant and complacent, a fact which resulted in 200 lost jobs, and which required the remaining employees to work day and night to save the company.

Crisis InterventionIt was a high point because I learned over the course of a few months perhaps the most important lesson of leadership: When it counts, people and organizations are capable of far more than we normally imagine. Anyone who has ever successfully navigated a business crisis knows that given good leadership, people rise to the challenge (see"Becoming a Chief Inspiration Officer").

For most leaders, the hard part isn't managing a crisis, it's tapping that extraordinary latent potential between crises, when things are going well. Many of the problems our company encountered could have been avoided entirely, and others could have been more easily handled if we had been willing to question ourselves during the good times.

Courting ParanoiaWith the survival of our company at stake, we could no longer avoid the issues which had seemed too sensitive or intractable to confront. And perhaps most importantly, people in middle management and on the front line started talking openly and aggressively about their views of the company's strategy—contributing many valuable insights.We sold the company a couple of years after the turnaround. I decided that never again would I allow a company I was leading to let its guard down during the good times. Since then, I have tried to build some paranoia into every business I have run or advised, tried to keep it a little off-balance, hoped to keep it alert as its key assumptions inevitably pass from reliable to dangerously outdated.

It seems to me that every company will have to deal with its crises one way or the other: either every day in small preventive doses, or every few years in painful, wrenching collisions with a changed reality. The former is far preferable.

We are former CEO's of public and private companies, large and small, who have led operations across a broad range of industries and around the globe. Using our Rapid Enterprise Development system (RED™), we have helped more than 200 companies develop strategy, build team alignment, and create a framework for accountable execution - in just days instead of months.